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8/4/2019 Business Cycles and Inflation
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Business
Cyclesand
Inflation
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Nature of Business Cycles
Cycles are
important feature
of nature.
The expansion
and contraction of
activities betrays
the existence of
business cycles.
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Phases of the Business Cycle
The prosperity
phase
The crisis (thecontraction or
recession) phase
The depressionphase
The recovery phase
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Prosperity phase
A period
where
continuous
expansion of
economicactivity
happens.
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Characteristics: High prices and great business activity
Large profits for business firms
Production is at full capacity
Increasing demand for many commodities
Increasing demand for labor
Increasing volume of sales
Increasing volume of credit extensions by
lenders
Large demand for credit
Rising interest rates
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Great
Business
Activity
Business
Firms
Great
Demand
LaborRaw
Materials &
other
commodities
Capital Land
Resulting to
Resulting to
Higher Outputs
Higher Sales
Higher Profits
Higher Wages
Higher Rent
Higher Interest Rates
Higher Prices of
Materials and Supplies
THE PROSPERITY PHASE
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Crisis or Recession Phase
When theeconomy has
reached thepeak ofexpansion and
contractionbegins to takeshape.
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Reduced
Business
Activity
Business
Firms
Reduced
Demand
LaborRaw
Materials &
other
commodities
Capital Land
Resulting to
Resulting to
Decreasing Outputs,
Sales, and Profits
Decreasing wages,
rent, interest rates,
prices of raw materials
and supplies
THE CRISIS OR RECESSION PHASE
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Depression phase
When
contraction of
economicactivities which
has began in the
recession phasehas reached its
lowest level.
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Characteristics: Many business have ceased operations
Profits are minimal, if it is still possible to make
some
Banks have plenty of idle funds Banks gradually reduce interest rates
Credit starts to become available
Unemployment is at its highest level
Many unemployed persons are willing to work at
lower wages
The prices of raw materials and supplies are low
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Greatly
Reduced
Business
Activity
Reduced Number of
Firms still operating
Very Low
Demand
LaborRaw
Materials &
other
commodities
Capital Land
Resulting to
Resulting to
Minimal Outputs,
Sales, and Profits
Low wages, rent,
interest rates, prices of
raw materials and
supplies
THE DEPRESSION PHASE
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Recovery phase Depression phase
cannot continueindefinitely.
Prices of variouseconomic resourcesare low, somebusiness firms that
have previouslyceased operationswill attempt tooperate again
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Characteristics: As the supply of commodities in the market gets
exhausted, demand for these begin to be felt;
Optimism among business men slowly develops,
prodding them to increase business activity;
The demand for labor increases, resulting to a decrease in
unemployment;
The purchasing power of the people rises;
The low rates of interest will attract business borrowings;
Prices slowly rise;
There is an increase in production output;
Idle plants are used and plans for construction of new
ones are considered.
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Increasing
Business
Activity
Business
Firms
Increasing
Demand
LaborRaw
Materials &
other
commodities
Capital Land
Resulting to
Resulting to
Increased Outputs,
Sales, and Profits
Increased wages, rent,
interest rates, prices of
raw materials and
supplies
THE RECOVERY PHASE
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The Business Cycle curve When plotted in a graph:
Highest point in the cycleis the prosperity phase orthe Peak period.
Lowest point is the
depression or the Troughperiod)
Descending linerepresents the recessionor the contraction
Ascending line representsthe recovery or expansionphase.
Trend line a generaltrend on the series of
business cycles.
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Common measures to control
business cycles The stabilization ofbusiness
Control of credit
Control of publicworks
Business forecasting
Monetary
readjustments Payment of high
wages
Economic planning
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Basic terms related to
inflation Price level
Used to indicate
how high or lowprices are in a
certain year
compared to theaverage of prices in
a certain base
period.
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Basic terms related to
inflation Market basket
Representativegroup of goods
and services
chosen by the
government togather information
of all commodities.
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Basic terms related to
inflation Price index
The index
number thatshows how theaverage price of
a bundle ofgoods haschanged over aperiod of time.
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Basic terms related to
inflation
Inflation
A rise in theaverage
level ofprices
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Basic terms related to
inflation Deflation
A decline inthe average
level ofprices
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Types of Inflation
Cost-push
inflation
Continualdecrease in the
aggregate supply
resulting toincrease in cost
of production.
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Types of Inflation
Demand-pull
inflation
Increase inaggregate
demand, thus
prices tend to goup.
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Types of Inflation
Inertial inflation
steady inflation
that occurs
when inflation is
built into
contracts and
peoples
expectations.
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